Tuesday, November 13, 2012

Corporate Bond Market Still Strong

As an aside, I wrote this piece on Sunday, so the charts do not include price action from Monday or Tuseday.  However, as most charts deal with weekly price movements, this really isn't a problem.

From the Financial Times: 

Investor inflows into bond funds have crossed the $400bn mark this year, underscoring the ravenous appetite for fixed income among pension funds and insurers. 

Bond funds tracked by EPFR Global, a data provider, attracted almost $10bn in the week ending November 7, extending what is a record-breaking year for the asset class. High yield, US and mortgage-backed bond fund inflows have all hit records, and emerging market bond funds are on track to do so. 

“With seven weeks of the year remaining bond funds are collectively well into record setting territory when it comes to attracting fresh money,” the data provider noted in its report. 

Some asset managers and strategists warn that there could be a bubble brewing in bond markets, as yields are pushed continually lower by the hunger for fixed income. 





Above are weekly charts for the Vanguard short (top chart), intermediate (middle) and long term (bottom) ETFs.  Notice they are all very strong. 

What Does the Fiscal Cliff Look Like?

From the Financial Times



The top chart shows the total amount of five areas while the bottom part shows the GDP impact of each. 

Morning Market Analysis



The homebuilders 1 hour chart (top chart) shows that prices formed a double top at the beginning of the month, but have been falling since.  The dialy chart (bottom chart) shows that prices have fallen through resistance around the 26 price level and continue to move lower.  Near term support is at the 50 day EMA and 24.5/25 price level.


Industrial metals -- which fell for most of October -- have bottomed around the 18 price level which provided technical resistance at the beginning of August.  Prices have been moving sideways for most of the month.  However, notice the buy signal we see on the MACD.



The daily chart of the Japanese ETF (top chart) shows prices have fallen through support.  But also not eh very weak MACD reading and inter-twined structure of the EMAs.  The weekly chart (lower chart) shows that prices are still consolidating in a broader downward sloping wedge.



The weekly chart of the Australian market (top chart) shows that prices have broken through resistance, but have lost upward momentum.  The daily chart (bottom chart) shows that prices are still moving higher, but at a decrease pace.  However, notice the weakening MACD picture, which shows that momentum is dropping. 

Monday, November 12, 2012

Bonddad Linkfest

  1. The GOP's electoral map problem (WaPo) 
  2. Senate begins talks on immigration reform (WaPo)
  3. Japanese economy shrinks .9% (Marketwatch)
  4. Japan nears fifth recession in 15 years (FT)
  5. US to overtake Saudi Arabia in oil production by 2020 (Marketwatch)
  6. Soybeans break technical support (Agweb)
  7. Corn and soybean production increased by USDA report (Agweb)
  8. India proposing to cut more red tape (FT)
  9. Anatomy of the fiscal cliff (FT)

Conservatives Reality Problem

From Forbes:

I don’t think it’s a coincidence that Team Romney’s polling cluelessness comes after years of conservatives demonizing pointy-headed academics, including scientists. On subjects like evolution, global warming, the biology of human conception, and even macroeconomics, conservatives have been increasingly bold about rejecting the consensus of scientific experts in favor of ideologically self-serving pronouncements. That attitude may have contributed to their loss of the White House in 2012. It will be much more costly for the country as a whole if it doesn’t change before the GOP next captures the White House.

.....

I think global warming is a more complex issue than some people on the left acknowledge. But rather than accepting the basic scientific reality of climate change and making the case that the costs of action outweigh the benefits, many conservatives have taken the cruder tack of simply attacking the entire enterprise of mainstream climate science as a hoax.

On macroeconomics, a broad spectrum of economists, ranging from John Maynard Keynes to Milton Friedman, supports the basic premise that recessions are caused by shortfalls in aggregate demand. Economists across the political spectrum agree that the government ought to take action counteract major aggregate demand shortfalls. There is, of course, a lot of disagreement about the details. Friedman argued that the Fed should be responsible for macroeconomic stabilization, while Keynes emphasized deficit spending.

There's a reason I continually pick on John Taylor's continual comparison of this expansion with the Reagan expansion: he should know better.  As a Stanford PHD and well respected economist, his statements should conform to provable reality.  Yet he continually argues that an expansion rooted in interest rate policy is directly comparable to a post financial crisis expansion when nothing could be further from the truth.  And his continual insistence on making the comparison should lower his position in public discourse such that he is no longer counseled for his advice.

This leads to a general problem with the conservative movement in general: facts which run counter to their beliefs are "created by liberals" and are therefore ignored.  The latest example of this is the CBOs study that tax cuts don't lead to economic growth.  This has been accepted in the economic world for some time.  Yet, Republicans complained and, as a result, the CBO withdrew the study to avoid controversy.  This is just the latest example. 

I've tried debating conservatives and frankly have now thrown in the towel.  The reason is simple: they live in an alternate universe where austerity and tax cuts lead to monumental growth, global warming is a liberal conspiracy and creationism is a valid scientific theory.  None of these things is even remotely true, yet you'd think each was in fact standard dogma.

Barry over at the BP had the best take on this:

5 Don’t live in a bubble. Large swaths of the conservative movement seem to live in a world of their own creation. The balkanization of media outlets allow people to read only that which they agree with. This selective perception and confirmation bias creates a self-reinforcing alternative universe. Facts don’t matter; data and science are irrelevant. You only hear exactly what it is you want to hear. 

Outlets like Fox News and pundits like George Will and Dick Morris were forecasting a Mitt Romney landslide. Don’t like the polling data? Create a site called “UnskewedPolls.com” to provide numbers you do like. As it turned out, UnskewedPolls was the least accurate polling aggregator this election cycle. If you spend most of your time rationalizing why the polls are inaccurate and the media are biased, you will probably be surprised at what happens next. As smart investors know, this sort of bias can be very expensive.

 It's great that this problem with reality is finally coming to bear.  Smashing it will, in the long run, greatly benefit our national discourse.  





   

Market Internals Are Looking Weaker

Consider the following charts of sector ETFs:


The weekly technology sector has broken a year-long trend line.  It also tried to break out of resistance over the last few months, only to fall back.  The MACD is declining and printed a weaker peak on the break-out and the CMF is declining and nearing 0.



The daily chart of the financial sector (top chart) shows that prices have broken trend.  Prices are now below the 10 and 20 day EMA (which are now both moving lower) as well as the 50 day EMA.  The CMF is weak.  On the weekly chart (bottom chart) notice that after breaking through resistance, prices have failed to rally higher.  In addition, last week sow a large bar printed on strong volume.

 
The consumer discretionary sector has broken trend as well, with a weaker MACD reading.  Last week saw a moderate volume spike.


The consumer staples sector's weekly chart is showing prices drop through support as well.  Prices are also below the shorter EMAs with an MACD that has given a sell signal and a weaker CMF.


The energy ETF -- which has been consolidating for over a year -- broke through resistance about tow months ago. However, the rally has failed and now prices are back within the pre-existing consolidation range.

The points from all the above charts is that no major market sector is rallying right now.


Morning Market Analysis

Last week, we saw the continued sell-off in the equities market.  After the election, the market turned its attention to a combination of the deteriorating situation in Europe and the fiscal cliff discussion in the US.  There is also concern about a somewhat lackluster earnings season.  As the equities market sold-off, we see money flow into the bond market in a classic flight to safety move.  




The 30 minute SPY chart (top chart) shows the 140.5 support level which prices broke on Wednesday.  The daily chart (bottom chart) shows that prices are still targeting the 200 day EMA in this sell-off.  Also note the continuing negative technical environment -- a declining MACD, negative CMF and declining EMAs.  Finally, notice the increased volume on the sell-off indicating the intensity of the decline is increasing.




Notice that two parts of the treasury curve have now broken through resistance and are moving higher.  All the remains is for the IEIs (3-7 year; top chart) to follow suit.  All three charts now have buy signals from the MACDs  and rising price strength.

Sunday, November 11, 2012

The case for 4 Constitutional Amendments


- by New Deal democrat

There have been no major structural changes in our Republic since women were given the right to vote and direct elections for the Senate almost a century ago. Since then, partly due to technology, and partly due to extremism, four serious abuses have come to the forefront of the system. They need to be corrected, and they need to be corrected in a systemic way that assures as best we can that they do not re-appear. That means amending the Constitution. If it won't be spoken of inside the Beltway, if it won't be acknowledged in the mainstream media, at least out here in the Oort Belt of the blogosphere, we need to speak the truth bluntly.

The four necessary Amendments to the Constitution are:
- an Anti-Gerrymandering amendment
- an Anti- Filibuster amendment
- an Anti-lame duck Congress amendment
- a *COUNTERCYCLICAL* balanced budget amendment

An Anti-Gerrymandering Amendment. We just had an election that produced the most lopsided House of Representatives vs. popular vote in over 60 years - and for only the second time in that period, handed a majority of seats to the party that obtained a minority of the total vote. Sam Wang of the Princeton Election Consortium shows that this outlier is so bad, it appears that it would have taken a 5% popular vote majority for democrats to produce even a 1 seat majority. If you don't believe me, click on the link and take a look at his scattergraph, and read his excellent analysis.

The math behind gerrymandering is not sophisticated. Let's take a hypothetical state that is entitled to 10 seats in the House. If you have a 50/50 electorate on the basis of party identification, you can gerrymander to give one party 9 of those 10 seats by making the electorate for 1 seat 100% of the "out" party, and the electorate for the remaining 9 seats 54.5% for the "in" party and 45.5% for the "out" party. If you want to insulate the "in" party further against a "wave" election favorable to the "out" party, simply allow 2 of the seats to be 100% "out" party electorate and the remaining 8 62.5% "in" party electorate and 37.5% "out" party electorate. Even an "in" party that captures state government with only 40% of party identification could generate 8 of the 10 Congressional seats with 57.1% "in" party and 42.9% "out" party electorates.

Before you decide that such a scenario isn't realistic, you might want to consider that there are a fair number of nearly 100% African American Congressional districts. You might also want to note that in Pennsylvania this election, the Democrats got only 5 of 18 House seats, and in Ohio the Democrats got only 4 of 16 House seats, despite the total popular vote in each being majority Democratic.

That is simply not democratic in the small "d" sense. The majority will is being deliberately throttled.

Even worse, there have been proposals to change "winner take all" Presidential electoral college allocations in, for example and not surprisingly, Pennsylvania. Imagine a Presidential candidate winning the popular vote in a state and obtaining only about 1/4 of its Electors! That's the direction in which we are going.

Regardless of which party does it, the Gerrymandering of the House is undemocratic. Further, since computer modeling made microselecting districts easy, only about 10% of House seats have been seriously contestable in any given election year.

Some states, of course, have nonpartisan commissions to draw up maps. Another option is to require that Congressional house maps follow County or Parish lines, and then municipal lines, as much as possible consistent with one voter/one vote, drawn so that it results in the minimum number of eligible voters living in a divided County or Municipality. To be sure that states wouldn't create or rearrange municipal boundaries to get around the requirement, the boundaries used would have to be sufficiently pre-existing (I would suggest by 20 years) to remove the temptation.

An Anti-Filibustering Amendment. The second practice that has gotten completely out of hand is the Senate filibuster. It is nowhere specified in the Constitution. It is merely an internal rule (each House of Congress is permitted to set its own procedural rules), and its abuse has become endemic, requiring a supermajority of voters to elect the same party in order ot accomplish anything. Again, this is true regardless of which party does it.

There may be a limited use for a filibuster, e.g., the lifetime appointment of Supreme and Appellate Court Judges; and/or there may be a value to a limited supermajority, e.g., 55 votes; exercized with some strict limits -- and again, regardless of which party is in or out of power. Even when it is used, it must be real, not by kabuki as it is now. If Senators in their 60s, 70s, and 80s (and the Senate is currently a gerontocracy with a median age of 68) really feel strongly enough about an issue, let them put their bodies to the test. But enough is enough.

An anti-lame duck Congress Amendment Third, for at least the second time in 14 years, we are in the midst of the use of a lame duck Congress to enact unpopular legislation by many members who have already retired or lost elections and so won't be subject to the crucible of re-elction contests. Now it is the "fiscal cliff" or "Grand Bargain", and in 1998 after the GOP leadership was staunchly rebuffed by the electorate, the lame ducks nevertheless proceeded with the Impeachment of Bill Clinton.

Use of a lame duck Congress to enact business that will be difficult for subsequent Congresses to undo (given the many checks and balances blocking action) is again fundamanentally (small "d") undemocratic, regardless of which party does so or even if both participate in the betrayal of their Constituents. While there may occasionally be emergency legislation that is required during such a session (imagine if the Pearl Harbor attack had occurred on December 7, 1940 rather than 1941), lame duck sessions have too much of the possibility of mischief.

To allow emergency legislation but prevent antidemocratic mischief, any enactment of a lame duck Congress should automatically have a quick expiration date, e.g., March 31 or June 30 of the following year. If the enactment were necessary, the incoming Congress would renew it. If not, it would expire.

A COUNTERCYCLICAL Balanced Budget Amendment Finally, despite Charlie Pierce calling it the Worst Idea Ever, the simple fact is that we need some sort of way to rein in chronic deficit spending. Keynes' economic idea always envisioned that surpluses would be run in the good times to make up for the deficit spending in the bad. In reality, those surpluses have almost never happened. With the sole exception of one year at the end of Bill Clinton's presidency, we have run deficits every single year since 1969. Since 1980 we have avoided the consequences because of the general disinflation of interest rates, which are now close to zero. Once those interest rates start to rise, Treasury Bonds issued to cover the debt will once again become the "certificates of confiscation" they were in the 1970s, and that way lies disaster.

So how do we overcome the propensity of legislators to run deficits even during the good times, which eventually straightjackets spending during horrible economic times? I see three possibilities: (1) using a statistical trigger such as 6% unemployment; (2) using the Courts as umpires; and/or (3) using the States as watchdogs.

As to (1) we could mandate for example a surplus be run if the unemployment rate drops below 6%. The drawback is that Congress would immediately start to try to redefine or change the measure. If no change in calculation could take effect for 10 years, that avernue of deception might be closed. As to (2), the Supreme Court could be tasked with appointing one or more Special Masters to report whether or not the economy were in an expansion sufficient to require a surplus. That would put political shenanigans at a one step remove, but it would tend to politicize the Supreme Court even more than it already is.

The thrid option seems best to me. The large majority of states must balance their budgets annually and cannot bottow money to run a deficit. That's why in deep recessions a lot of Federal stimulus usually goes to the states. States have avery powerful incentive to assure that a "rainy day fund" exists at the Federal level to be dispensed to them in times of need. If such a fund had to be sourced from a surplus run during good economic times, the States sould have a very powerful incentive to make sure the Congress runs one. If the Federal government were forced to run a surplus in every year that a majority of States by number or population ordered them to, the problem would be overcome.

About 5 years ago, when I floated the idea of a countercyclical balanced budget amendment at Daily Kos, many people didn't get the "countercyclical" part, or else didn't feel that deficits were a problem. Even if that were the case, look at what the Bush tax cuts have wrought. They have completely blown a hole in the budget for over a decade, they are the single biggest portion of the national debt, and in response even a Democratic President and Senate are willing to entertain cuts in Social Security and Medicare -- all to wind up with tax rates less than existed during Clinton's presidency. If requiring the federal budget to be balanced on a countercyclical basis saved Social Security and Medicare, it would be well worth it.

In summary, the structural foundations of our Republic are in dire need of fixing. Gerrymandering, the filibuster, the use of lame duck Congresses, and the chronically unbalanced federal budget are all cancers on the organism of oiur body politic. Even though there may be no chance that the politically ascendant financier class will want to consider them, and even though I may be just one voice communicating from the Oort Cloud of the deep economic blogosphere, someone has to start pointing out the ultimate remedies.

Saturday, November 10, 2012

Weekly Indicators: maximum hurricane impact edition


  - by New Deal democrat

The monthly economic news this week was sparse. Consumer confidence rose to a 5 year high. The expectations component of this is an element of the LEI. The ISM services index showed slightly less expansion. Manufacturing inventories increased slightly. Consumer credit expanded less.

Many of the high frequency weekly indicators this past week were affected by Hurricane Sandy, so they must be treated with lots of skepticism. After one more week, the influence of the hurricane shuold pass.

Same Store Sales and Gallup consumer spending varied from weakly positive to substantially negative, although Gallup is almost certainly due to the hurricane:

The ICSC reported that same store sales for the week ending October 26 fell -0.2% w/w and were up +1.4% YoY.  Johnson Redbook reported a very weak 0.8% YoY gain. Johnson Redbook has consistently been lower than the other series for consumer spending. The 14 day average of Gallup daily consumer spending as of November 8 was $65, compared with $71 last year for this period. This is the worst showing in a long time for Gallup, and would probably have been poor anyway, but Hurricane Sandy almost certainly impacted this number.

Bond yields were mixed and credit spreads reamined close to their recent lows:

Weekly BAA commercial bond yields declined -0.05% this week to 4.49%. Yields on 10 year treasury bonds fell -0.07% to 1.74%.  The credit spread between the two increased by 0.01% to 2.75%, just off its 15 month low. This remains an excellent trend, as it demonstrates a lack of fear of corporate default.

Housing reports were generally positive although weakly so:

The Mortgage Bankers' Association reported that the seasonally adjusted Purchase Index fell -5% from the prior week, but is still up 3% YoY. These remain in the upper part of their 2+ year range. The Refinance Index also fell -5% for the week, retreating further from recent multi-year highs.

The Federal Reserve Bank's weekly H8 report of real estate loans this week rose by 3 to 3531, or +0.1%. The YoY comparison, however, fell slightly to +1.3%, and is also 1.5% above its bottom.

YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker  increased +1.2% from a year ago.  YoY asking prices have been positive for over 11 months, although this is the weekest YoY comparison in many months.

Money supply remains generally positive:

M1 was up +0.5% for the week, and increased +3.5% month over month.  Its YoY growth rate declined slightly to +13.7%. As a result, Real M1 also declined to +11.7% YoY. M2 was up +0.4% for the week, and was up 0.8% month over month.  Its YoY growth rate increased slightly to 7.3%, so Real M2 also rsoe slightly to 5.3%. The growth rate for real money supply is still quite positive.

Employment related indicators were neutral to positive:

The Department of Labor reported that Initial jobless claims declined 8000 to 355,000 from last week's unrevised 363,000. The four week average rose by 3250 to 370,500, 2% above its post-recession low.

The American Staffing Association Index was again level at 95, the same level at which has been for about 2 months. The sieways trend in this index is similar to last year.

The Daily Treasury Statement showed that for the first 6 days of November, $42.5 B was collected vs. $ 40.6 B a year ago, a $1.9 B or increase. For the last 20 days ending on Thursday, $133.5 B was collected vs. $128.8 B for the comparable period in 2011, a gain of $4.7 B or +3.6%. This is towards the weak end 20 day YoY comparisons.

Rail traffic remained negative YoY, but still due to coal, while the diffusion index decreased considerably:

The American Association of Railroads  reported that total rail traffic was down -34,900 carloads YoY, or -6.5%.  Non-intermodal rail carloads were again off a large -6.8% YoY or -20,200, once again entirely due to coal hauling which was off -21,300. Excluding coal, carloads were up 1100, but it is possible this was affected by preparations for the anticipated landfalling hurricane in the northeast. Negative comparisons remained even at 11 types of carloads.  Intermodal traffic was down -14,500 or -6.3% YoY.

Finally, the price of oil rose while gasoline fell, and gasoline usage was mixed:

Gasoline prices fell another $.08 last week to $3.49. This is nevertheless still quite high for this time of year. Oil prices per barrel increased from $84.86 to $86.07. Gasoline usage for one week was 8307 M gallons vs. 8671 M a year ago, down -4.2%. The 4 week average at 8593 M vs. 8572 M one year ago, was actually up 0.2% YoY.

Turning now to the high frequency indicators for the global economy:

The TED spread remained just above its 52 week low, 0.22. The one month LIBOR  also remained at its new 52 week low of 0.2090. Both are well below their 2010 peaks.

The Baltic Dry Index fell from 986 to 940, well above its recent 52 week low of 662. The longer term declining trend in shipping rates for the last 3 years remains. The Harpex Shipping Index fell by 4 to 367, another new 52 week low.

Finally, the JoC ECRI industrial commodities index rose from 118.21 to 118.99. It turned slightly positive, up +0.10.

Housing, money supply, bank overnight rates, and corporate yields and credit spreads all remained very positive. Jobless claims were neutraland. Gas prices are for now a positive. Other commodities are neutral.

Meanwhile rail carloads, shipping rates, and gas usage remain generally negative and continue to the contrast between transportation and other indicators.

Too many series were affected by Hurricane Sandy to read much into this week's data. The effects should begin to recede next week. Have a nice weekend.

Friday, November 9, 2012

Weekend Weimar, Pit Bull and Beagle





The Slowing South Korean Economy

As China has slowed, so have the surrounding economies.  South Korea presents a good example.


The percentage change from the previous quarter has been slowing down for teh last 8 quarters, with a more pronounced slowdown over the last four.   The big reason for this is the marked slowdown in investment, which has been negative in four of the last 5 quarters.  This would have been five had it not been for a big investment in facilities in 1Q12 -- which is probably a one off figure.


Also note that we see negative numbers in two key economic areas: manufacturing -- which has printed negative growth in three of the last four quarters and construction -- which has also printed negative growth in three of the last four quarters.


The year over year figures also highlight the slowdown.  First, notice the overall YOY growth rate has slowed in each of the last three quarters, falling from 2.8% in the first quarter to 1.6 in the third.  Second, note the accelerated slowdown in three key areas over the last three quarters: manufacturing, construction and exports.

These are not the kind of growth numbers any central bank wants to see for their economy.

A note about "democracy" in America


- by New Deal democrat

We now know just how significant the effect of gerrymandering was in the 2012 elections for the House of Representatives.

Democratic candidates received a total of 53.95 million votes, or 50.26%. Republican candidates received a total of 53.40 million votes, or 49.74%.

Despite this, the likely make-up of the next House of Representatives is going to be 200 Democrats (46%) and 235 Republicans (54%).

Over the weekend I plan on arguing that there are 4 desparately needed amendments to the US Constitution, and that those amendments should be initiated by the State Legislatures as permitted by the Constitution if the Congress will not act.

Morning Market Analysis



The 60 minute TLT chart (top chart) shows that the TLTs broke through resistance around the 124.5 area.  But on the daily chart (lower chart) notice prices printed a very strong bar yesterday on very high volume.  The MACD has also given a buy signal.  This is a flight to safety, plain and simple.


the GLD ETF continues its rebound, although yesterday's volume is disappointing for the bulls.  Bow prices are above all the EMAs with the next level of resistance the Fib fan just above 168.


The homebuilding sector has fallen through support just below the 26.5 level with the next logical price target the 50 day EMA.  However, notice the rising CMF.  This looks like a temporary sell-off that's in sympathy with the larger market as a whole.


The Russian market has broken its nearly 6-month trend line and is now below all the EMAs.  The shorter EMAs have crossed below the 200 day EMA.  The MACD is moving lower and the CMF is negative.  Put succinctly, this is a chart that wants to move lower.

Thursday, November 8, 2012

Bonddad Linkfest

  1. Overtures on debt deal (WaPo)
  2. Obama's coalition (WaPo)
  3. Republicans face a difficult future (WaPo)
  4. BOE keeps rates at .5% (BOE)
  5. ECB keeps rates unchanged (ECB)
  6. Greece approves austerity (FT)
  7. Day after election DOW performance means nothing (Marketwatch)
  8. Jobless recoveries and the disappearance of routine occupations (Thoma)
  9. FT on the ECB's decision (FT)
  10. BOE halts bond buying; may try to stimulate lending (BB)

Tax Reform is Easy: Try This Plan

Everyone (on both sides of the aisle) loves to talk about how we need tax reform to both broaden the base and increase locked up growth potential and yet we can never seem to even get reform started.  So, I thought, why not lay out a real simple tax reform plan that both sides should be able to get their arms around just as an example of how easy this really should be (of course, I live in a world without lobbyists or wealthy patrons to please).

First, Speaker of the House John Boehner yesterday offered up his cooperation with the line that if Reagan and Tip O'Neill could do tax reform, so could he.  I think this provides us with our starting point to get the President on board, as a key feature of the Reagan/O'Neill Reform was to treat capital gains and dividends as ordinary income (albeit at a lowered top rate).  I believe that if Republicans are willing to put this on the table it would make major tax reform politically possible and really enable potential marginal rate decreases.

So again, assuming my world of no lobbyists and one where Boehner puts dividens/capital gains on the table, here is my plan in 5 easy steps:

1) As above, treat capital gains and dividends as ordinary income.
2) Cap charitable giving at 10% of income (ie a tithe).
3) Eliminate the mortgage interest deduction through a 5 or 10 year phaseout (ie 10/20% of value lost each year until it is gone).  If there is ever a time to get rid of the mortgage interest deduction it is right now with 3.5% 30 year mortgage rates.
4) Phase out state and local tax deductions over a ten year period.  There is no reason we should subsidize those who want to live in high tax/cost areas at the expense of those who don't (and yes, that is how it works).
5) Phase out the child tax credit over ten years (ie $100/year).

The tax exemption for employer provided health insurance would stay (its elimination would be way too regressive), but I would eliminate most other "minor" deductions in order to get more rate savings (and simplicity in the code).

The end rates would vary (and would actually decline each year through the phaseouts) depending on how much of the eliminated tax expenditures would be used to lower rates vs raise revenue (Simpson-Bowles used a 90-10 split, with 90% going to lower rates).  I would also suggest we go down to 3 brackets (say up to $100k, 101k-999K, and over $1 million) to keep things simple.  Obviously, there would be some standard deduction/exemptions still in play for those that don't itemize (which would be almost everyone in 10 years) and to keep the code more progressive .  

Seems to me this could be a pretty easy basis for tax reform that would allow for economic adjustments due to the gradual nature of the phaseouts.

The UK's Growth Problems (or, Thank God For the Olympics)


The above chart is from the latest release of UK GDP.  Notice the black line which is total GDP.  It has essentially been flat for the duration of the recovery.  In fact, the only major change that we see of all the various components is a bump in construction in 2010 and 2011.

 
The above chart highlights the basic problem.  First, note the continual negative reading in production for the last 7 quarters.  Before that, we see growth at very low levels, indicating production is barely growing at all.  Next, note that construction has contracted for the last three quarters -- and at a fairly strong clip.  Finally, services have been just barely growing over the last 8 quarters.




Morning Market Analysis

Given yesterday's sell-off -- and it's proximity to the election -- let's take a look at the US equity market over a series of several charts.


On the 5-minute chart, we see that prices gapped lower at the open, moved lower until lunch and then rallied until the close.  The rally was stalled by the natural resistance that occurs at Fib levels.  Look closely at the volume over the rally, which was lower than the sell-off.  Also note the smaller candles and less severe nature of the rally.  My guess is this is a technical purchasing rally.


On the 60 minute chart, notice that prices have fallen below the key support level of 141, which was established multiple times over the last two weeks.


On the daily chart, we see the importance of the 141 price level.  Also note that prices have sold-off to Fib levels on very high volume.  Also note the weakening MACD and CMF.  On this chart, I'd target the 200 day EMA as the next price target.



The weekly chart (top chart) shows that prices are right at important support.  The MACD is close to giving a sell-signal, the the CMF is strong.  The monthly chart (bottom chart) is very concerning, as it indicates that prices are right at support for the long-term rally that started in 2011. 

Wednesday, November 7, 2012

Bonddad Linkfest

  1. The 10 best stocks since the last election (Marketwatch)
  2. Australia keeps rates unchanged (RBA)
  3. Service ISM at 54.2 (ISM)
  4. Japanese LEIs drop 
  5. UK production and manufacturing down (ONS)
  6. Five lessons from the election (WaPo) 
  7. Barry's election lessons (BP) 

 

Three lessons from yesterday's election


- by New Deal democrat

Regular economic blogging will resume shortly. I can't let the election pass without noting a few Big Picture items:

1. The "Whistling Past Dixie" majority is here.

Obama won when Ohio was called by all the networks at about 11:20 p.m. EST. At that time Obama hadn't won even one state in the Confederacy. As I type this, Florida is still out, and Virginia was just the icing on the cake. Looking at past electoral college results, this is the first time since 1924 - 88 years ago - that Dixie has voted uniformly for one candidate, and that candidate has still lost. This is a major shift in electoral politics, even more dramatic than in 2008, and likely to endure (obviously not in every election) for at least a generation.

2. The "tea party" has cost the GOP the Senate.

The GOP lost at least 4 easy Senate pick-ups between 2010 and 2012. By nominating right wing purists (or nutcases) in Nevada (Sharron Angle) and Delaware (Chris MacDonnell) in 2010, and Todd Akin (Missouri) and Richard Mourdock (Indiana) in 2012, the GOP threw away 4 easy seats. In each case a more "pure" social conservative defeated a traditional GOP conservative in the primary (e.g., Tom Carper in Delaware, Richard Lugar in Indiana), and then lost the general election. As a progressive, I hope the GOP learns no lesson whatsoever from this.

3. The balance of power on the Supreme Court is likely to change.

Two of the five reactionary Supreme Court Justices are in their late 70's. Both Justices Scalia and Kennedy are 76 years old. It's likely that Obama will have the chance to replace at least one of them in the next four years. Obama will appoint a moderate or liberal to replace them. For the first time since 1969, the Court will begin to move to the left.

These are still the beginings of several trends that will take decades to play out. The GOP's "southern strategy" began in 1968 and was wildly successful through 2004. The "Whistling past Dixie" majority is still in its early stages.

P.S.: In the most underreported vote last night, with possibly the biggest long-term impact on the country, Puerto Rico voted in favor of statehood. In a two-step referendum, 54% voted to change the island's status with the US, and then 61% voted to become a US state. The referendum is not binding on the Congress, and I don't see the GOP House honoring it, but this is a Big Effing Deal.

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From Bonddad

Let me add my two cents (inflation adjusted, of course).

Being a creature of habit and routine, I've had a regular dinner at the same restaurant for the last 10 years (literally).  It's in an area of Houston that has a very good school system, so it attracts families.  Over that time, I've seen the customer make-up change drastically.  The biggest difference is that whites are now a minority.  Obama won without a majority of the white vote for the second time.  That's a huge change and represents a vast difference in US politics.

To continue, the next states that will become swing states are Arizona and Texas.  Both have growing Hispanic populations which will soon outnumber whites.  And the Republican party has done nothing but completely antagonize this population for the last 10 years.  Several states have passed bills that deal with asking for papers to prove citizenship.  This even got on Gabriel Iglesias' nerves -- so much so that he wanted to play a joke on the entire state.  When you've gotten Fluffy to become political, you've really crossed a line.

Lindsay Graham said it best:

"The demographics race we're losing badly," Sen. Lindsey Graham (R-SC) told the Washington Post. "We're not generating enough angry white guys to stay in business for the long term."

I've written this before, but I think it bears repeating.  This was Romney's election to lose.  The economy was weak, and Obama was not in a strong position.  Yet Romney did lose.  And that should terrify Republicans badly.  The question is, why?  And the answer is the Republican base pulled all the candidates to the political right of Stalin during the primary season, giving the Obama campaign ample fodder during the election.  Think about all the lines the Democrats used against the Republicans that Romney uttered during the primary contests: "Planned Parenthood, we'll get rid of that;" "I object to FEMA;" etc...

In addition, none of the Republican candidates looked reasonable.  Instead, they all looked nuts, literally trying to outdo each other with their own brand of crazy.  Herman Caine's slogan was the equivalent of a pizza commercial, Michelle Bachman thinks vaccines cause autism, Rick Perry can't get a complete sentence out ... the list goes on.  Not one of these people were serious people who a rational person could trust with true power.

I think one of the biggest reasons for this is the anti-science/anti-intellectual bent of the current Republican leadership.  Remember Rick Santorum's "the president is a snob because he wants people to go to school" line?  From denouncing global warming (ask New York if that's just a theory) to arguing for the teaching of creationism to the banning of studies that disprove a central tenant of your platform, the Republicans have been at war with facts, figures and data for a number of years.  And the end result is that stupid is winning.  Consider that only 6% of scientists identify as Republicans.     

The Republicans have a lot of soul searching to do right now.  If they continue on their current path, they will only be able to attract uneducated whites -- a declining population.  That's not exactly what you want your base to be.

Morning Market Analysis


Yesterday, the oil market made an extremely strong move on high volume.  Prices advanced through the 10 and 20 day EMA and touched the upper resistance line.  Advances like this are important as they would indicate a change in overall sentiment. 




The 60 minute dollar chart (top chart) shows that the 21.95 price level was providing important resistance to the dollar chart.  The daily chart (bottom chart) shows that prices consolidated between the 21.5 and 22 price level.  They have since broken out, advancing above the 50 day EMA.


Industrial metals are still trading in a range between the 17.5/18 level and 20/21 level.  Until this chart shows more bullish developments the economy won't be ready to move into a higher GDP position.




After falling from the 174 area top chart), gold rebounded yesterday, bouncing off the 50 day EMA and price levels established in mid-August.  The weekly chart (bottom chart) shows that prices are in fact trading in a range between 150 and 174.

Tuesday, November 6, 2012

About the New Found Chinese Manufacturing Growth ....

Last week, the market received some positive news from China:

China’s manufacturing PMI came in at 50.2 in October. For the first time in three months, the index reading was higher than the neutral level of 50, indicating that the manufacturing sector in China has expanded again.

However, let's look at the last six months of reports:


The "50" line is the difference between contraction and expansion.  For the last six months, the figure has fluctuated right around a 50 reading, indicating that the manufacturing sector is right between expansion and contraction.

While this report did have some strong internals, the net overall impact/effect is not that great.  In addition, consider the latest report from HSBC:

After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – posted 49.5 in October, up from 47.9 in September, to signal a full year of monthly deteriorations in Chinese manufacturing sector operating conditions. However, with the PMI at an eight-month high, the latest data indicated the rate of deterioration was marginal.

Here's their data in chart form:



 In short, this is hardly news to start a new bull run on.  At least, not yet.